[Federal Register Volume 62, Number 129 (Monday, July 7, 1997)]
[Rules and Regulations]
[Pages 36216-36226]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-17647]


=======================================================================
-----------------------------------------------------------------------

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Chapter I

[CC Docket No. 96-149; FCC 97-222]


Implementation of the Non-Accounting Safeguards of Sections 271 
and 272 of the Communications Act of 1934, as Amended

AGENCY: Federal Communications Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Second Order on Reconsideration (Order) released June 24, 
1997 examines the proper interpretation of section 272(e)(4) of the 
Communications Act of 1934, as amended by the Telecommunications Act of 
1996 (the Act). The Order concludes that the Commission's original 
interpretation--that section 272(e)(4) imposes requirements on Bell 
Operating Company (BOC) provision of interLATA services that the BOCs 
are otherwise authorized to provide--is the only one that resolves an 
apparent conflict with section 272(a) in a way that squares with the 
considered policy choice Congress made in imposing a separate affiliate 
requirement for BOC provision of in-region interLATA services.

EFFECTIVE DATE: August 6, 1997.

FOR FURTHER INFORMATION CONTACT: Lisa Choi, Attorney, Common Carrier 
Bureau, Policy and Program Planning Division, (202) 418-1580.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Order 
adopted June 20, 1997, and released June 24, 1997. The full text of 
this Order is available for inspection and copying during normal 
business hours in the FCC Reference Center, 1919 M St., N.W., Room 239, 
Washington, D.C. The complete text also may be obtained through the 
World Wide Web, at http://www.fcc.gov/Bureaus/Common Carrier/Orders/
fcc97-222.wp, or may be purchased from the Commission's copy 
contractor, International Transcription Service, Inc., (202) 857-3800, 
2100 M St., N.W., Suite 140, Washington, D.C. 20037.

Regulatory Flexibility Certification

    The changes adopted in this Order do not affect our certification 
in the First Report and Order (62 FR 2927 (January 21, 1997)).

Synopsis of Order on Reconsideration

I. Introduction and Summary

    1. In the Non-Accounting Safeguards First Report and Order, 
released on December 24, 1996, the Commission implemented the non-
accounting safeguards provisions of the Communications Act of 1934, as 
amended by the Telecommunications Act of 1996 (Communications Act). 
These provisions generally prescribe the manner in which the Bell 
Operating Companies (BOCs) may enter certain new markets, including the 
in-region interLATA services market. In this Second Order on 
Reconsideration, we examine in greater depth the proper interpretation 
of one of these provisions, section 272(e)(4).
    2. The BOCs' interpretation--that section 272(e)(4) is an 
affirmative grant of authority allowing a BOC to provide directly 
(i.e., not through a separate affiliate) in-region interLATA services 
on a wholesale basis--presents an apparent conflict with section 
272(a), which, in relevant part, prohibits a BOC from doing precisely 
this. Such conflict is only heightened by the requirement in section 
272(b)(1) that a BOC and its separate affiliate must ``operate 
independently,'' which, as explained below, presupposes that the BOC 
may not provide any in-region interLATA services directly.
    3. Confronting this apparent conflict, we conclude that our 
original interpretation--that section 272(e)(4) imposes requirements on 
BOC provision of interLATA services that the BOCs are otherwise 
authorized to provide--is the only one that resolves the conflict in a 
way that squares with the considered policy choice Congress made in 
imposing a separate affiliate requirement for BOC provision of in-
region interLATA services. In the past, where courts and agencies have 
chosen to impose separate affiliate requirements on the BOCs for 
competitive services requiring local BOC facilities as an input, the 
defining feature of such requirements has always been a prohibition on 
providing such services on an end-to-end physically integrated basis, 
and for an obvious reason. It is precisely the provision of such 
services on an end-to-end physically integrated basis that gives rise 
to the concerns that separate affiliate requirements are intended to 
address. Our original interpretation of section 272(e)(4) preserves 
this essential prohibition, while the BOCs' interpretation, under which 
section 272(e)(4) is a grant of authority, eviscerates it. Our 
interpretation is bolstered by our view that it is exceedingly unlikely 
that Congress would have tucked away a fundamental grant of authority 
in section 272(e), which imposes obligations on the BOCs in response to 
requests from unaffiliated carriers. The thrust of section 272 is 
likewise to limit, not expand, BOC authority.

II. Statutory Framework

    4. BOC entry into the in-region interLATA services market is 
governed by sections 271 and 272 of the Communications Act. Section 
271(a) states that neither a BOC nor an affiliate ``may provide 
interLATA services except as provided in this section.'' Section 271(b) 
grants immediate authorization to a BOC or its affiliate to provide 
interLATA services originating outside of the BOC's in-region states 
(``out-of-region'' interLATA services) and to provide six specified 
``incidental'' interLATA services. Section 271(f) explains that the 
prohibition in section 271(a) does not apply to any activities 
``previously

[[Page 36217]]

authorized'' by the court that administered the AT&T Consent Decree.
    5. With respect to interLATA services originating within a BOC's 
in-region states (``in-region'' interLATA services), 271(b) does not 
authorize immediate entry. Specifically, section 271(b)(1) states that 
a BOC or its affiliate may provide in-region interLATA services 
originating in a particular state if, and only if, the Commission 
formally approves the provision of such services pursuant to section 
271(d)(3). Section 271(d)(3) approval for a particular state is 
generally designed to ensure that the BOC has taken sufficient steps to 
open its local exchange network in that state to competition. As 
explained in the Non-Accounting Safeguards First Report and Order, 
Congress recognized that section 271(d)(3) approval might be granted in 
a particular state before the local exchange market in that state 
became fully competitive. Congress thus enacted section 272 to respond 
to the concerns about anticompetitive discrimination and cost-shifting 
that arise when a BOC enters the interLATA services market in an in-
region state in which the local exchange market is not yet fully 
competitive. As reflected in the title of section 272 (``Separate 
Affiliate; Safeguards''), Congress chose to respond to these concerns 
through the structural requirement of a separate affiliate. Thus, 
section 272(a)(1) provides that ``[a] Bell operating company (including 
any affiliate) * * * may not provide any service described in [section 
272(a)(2)] unless it provides that service through one or more 
[separate] affiliates'' that operate independently of the BOC.
    6. Section 272(a)(2) lists three kinds of services for which a 
separate affiliate is required: (a) Manufacturing services, (b) 
``[o]rigination of interLATA telecommunications services'' other than 
out-of-region services, previously authorized services, and all but one 
of the six incidental services, and (c) ``[i]nterLATA information 
services'' other than electronic publishing services and alarm 
monitoring services. Thus, section 272(a)(2) requires a separate 
affiliate for the origination of all but three kinds of interLATA 
telecommunications services (out-of-region services, previously 
authorized services, and most incidental services) and all but two 
kinds of interLATA information services (electronic publishing services 
and alarm monitoring services).
    7. As a general matter, the other provisions in section 272 define 
more precisely how structurally separate the BOC and its section 272 
interLATA affiliate must be, and the terms of any relationship between 
the two. With regards to structural separation, the most significant 
provisions in section 272 are section 272(b)(1), which requires the 
separate affiliate to ``operate independently from the [BOC],'' section 
272(b)(2), which requires it to keep ``separate'' books of account, and 
section 272(b)(3), which requires it to have ``separate officers, 
directors, and employees.'' With regard to the relationship between the 
BOC and its structurally separate affiliate, the most significant 
provisions are section 272(b)(5), which requires that any dealings 
between the two be conducted ``on an arm's length basis,'' ``reduced to 
writing,'' and made ``available for public inspection,'' and section 
272(c)(1), which provides that in such dealings, a BOC ``may not 
discriminate between [the BOC] or affiliate and any other entity in the 
provision or procurement of goods, services, facilities, and 
information, or in the establishment of standards.''
    8. Section 272(e), which is entitled ``Fulfillment of Certain 
Requests,'' contains four provisions, three of which impose 
particularized non-discrimination requirements pertaining to direct BOC 
provision of telephone exchange service and exchange access. 
Specifically, section 272(e)(1) states that a BOC ``shall fulfill any 
requests from an unaffiliated entity for telephone exchange service and 
exchange access within a period no longer than the period in which it 
provides such telephone exchange service and exchange access to itself 
or to its affiliates''; section 272(e)(2) states that a BOC ``shall not 
provide any facilities, services, or information concerning its 
provision of exchange access to [an] affiliate * * * unless such 
facilities, services, or information are made available to other 
providers of interLATA services in that market on the same terms and 
conditions''; and section 272(e)(3) states that a BOC ``shall charge 
the affiliate * * *, or impute to itself (if using the access for its 
provision of its own services), an amount for access to its telephone 
exchange service and exchange access that is no less than the amount 
charged to any unaffiliated interexchange carriers for such service.'' 
The fourth subsection, section 272(e)(4), is the subject of this order. 
As the Joint Explanatory Statement describes them, these provisions are 
``[a]dditional requirements for the provision of interLATA services'' 
that are ``intended to reduce litigation by establishing in advance the 
standard to which a BOC entity that provides telephone exchange service 
or exchange access service must comply in providing interconnection to 
an unaffiliated entity.''
    9. The final provision in the statutory framework governing BOC 
entry that bears mention is section 272(f), which provides, among other 
things, for the sunset of the separate affiliate requirement in section 
272(a). With respect to ``interLATA telecommunications services'' in 
particular, 272(f) provides for sunset three years after grant of 
section 271(d)(3) approval, unless the Commission extends the three-
year period by rule or order. For interLATA information services, the 
sunset period is four years after enactment of the Telecommunications 
Act of 1996 unless extended by rule or order.
    10. In the Non-Accounting Safeguards First Report and Order, we 
implemented these and other provisions of section 272. In so doing, we 
explained that the structural and nondiscrimination requirements taken 
together were intended by Congress to effectuate the goal of preventing 
anticompetitive abuses by BOCs that control essential local facilities 
and seek to enter competitive markets that require these facilities as 
an input. More generally, we explained that:

[o]ur task is to implement section 272 in a manner that ensures that 
the fundamental goal of the 1996 Act is attained--to open all 
telecommunications markets to robust competition--but at the same 
time does not impose requirements on the BOCs that will unfairly 
handicap them in their ability to compete. The rules and policies 
adopted in this order seek to preserve the carefully crafted 
statutory balance to the extent possible until facilities-based 
alternatives to the local exchange and exchange access services of 
the BOCs make those safeguards no longer necessary.

    11. Of particular significance in the present context is the 
Commission's implementation of the ``operate independently'' 
requirement in section 272(b)(1). As discussed below, the Commission's 
implementation of the ``operate independently'' requirement is 
significant because while not in dispute in the instant proceeding, the 
fundamental policy issue that implementation addressed--the degree of 
permissible physical integration between the BOC's local network and 
the separate affiliate's interLATA network where the affiliate chooses 
to have such a network--overlaps considerably with the fundamental 
policy issue raised by the BOCs' proposed reading of section 272(e)(4), 
namely whether the BOC may own and operate an interLATA network within 
the local operating company itself and

[[Page 36218]]

thus provide interLATA services on a wholly integrated basis.
    12. In the Non-Accounting Safeguards First Report and Order, we 
concluded that the ``operate independently'' requirement entails four 
important restrictions: (1) No joint BOC-affiliate ownership of 
switching and transmission facilities, (2) no joint ownership of the 
land and buildings on which such facilities are located, (3) no 
provision of operation, installation, or maintenance services by the 
BOC (or non-section 272 affiliate) with regards to the section 272 
affiliate's facilities, and (4) no provision by the section 272 
affiliate of operation, installation, or maintenance services with 
respect to the BOC's facilities. We determined that these restrictions 
are necessary to prevent the ``substantial integration'' of the BOC's 
local network and the affiliate's interLATA network where the affiliate 
chooses to have such a network. Such integration, we concluded, is the 
antithesis of genuine independent operation, for it creates the very 
dangers of discrimination and improper cost allocation that section 272 
was designed to prevent. With respect to the possibility of 
discrimination, we explained that the non-discrimination requirements 
in sections 272(b)(5) and 272(c)(1) and elsewhere ``would offer little 
protection if a BOC and its section 272 affiliate were permitted to own 
transmission and switching facilities jointly.'' For example, ``[t]o 
the extent that a section 272 affiliate jointly owned transmission and 
switching facilities with a BOC, the affiliate would not have to 
contract with the BOC to obtain such facilities, thereby precluding a 
comparison of the terms of transactions between a BOC and a section 272 
affiliate with the terms of transactions between a BOC and a competitor 
of the section 272 affiliate.'' Together, then, ``the prohibition on 
joint ownership * * * and the nondiscrimination requirements should 
ensure that competitors can obtain access to transmission and switching 
facilities equivalent to that which section 272 affiliates receive.'' 
With respect to the possibility of improper cost allocation, we 
explained that, ``[b]ecause the costs of wired telephone networks and 
network premises are largely fixed and largely shared among local, 
access, and other services, sharing of switching and transmission 
facilities may provide a significant opportunity for improper 
allocation of costs between the BOC and its section 272 affiliate.'' 
The specific concern with improper cost allocation in this context is 
that an undue proportion of these shared costs will be allocated to a 
BOC's local operations, which has two negative effects. First, assuming 
that the BOC is subject to a regulatory regime that links the local 
rates it can charge to its costs and that the local market is not fully 
competitive, such overallocation of costs would allow the BOC to 
overcharge its local ratepayers by providing local service at a high 
price that overestimates the true costs of that service. Second, an 
overallocation of costs to the BOC's local operations means an 
underallocation of costs to the affiliate's long-distance operations, 
which would allow the affiliate to undercut inefficiently its 
interexchange competitors by providing a long-distance service at a low 
price that underestimates the true costs of that service.

III. Background and Positions of the Parties

    13. Section 272(e)(4) states that a BOC ``may provide any interLATA 
or intraLATA facilities or services to its interLATA affiliate if such 
services or facilities are made available to all carriers at the same 
rates and on the same terms and conditions, and so long as the costs 
are appropriately allocated.'' In the Non-Accounting Safeguards First 
Report and Order, the Commission rejected arguments that section 
272(e)(4) is an affirmative grant of authority for BOCs to provide 
directly interLATA services on a wholesale basis, including in-region 
services. Rather, the Commission read section 272(e)(4) as a limitation 
of authority, that is, as imposing a non-discrimination and cost-
allocation requirement on the provision of any interLATA or intraLATA 
facilities or services that the BOC is otherwise authorized to provide.
    14. On February 11, 1997, Bell Atlantic and PacTel sought summary 
reversal of the Commission's interpretation of section 272(e)(4) in the 
United States Court of Appeals for the District of Columbia Circuit. 
The Commission responded, among other things, that some of the 
statutory arguments that these BOCs advanced before the court had not 
been clearly presented to the Commission, and thus that the Commission 
should have an opportunity, prior to judicial review, to reconsider on 
an expedited basis its interpretation in light of these arguments. On 
March 31, 1997, the court granted the Commission's request, and noted 
its expectation that the Commission would complete its reconsideration 
within 90 days (which is the timeframe the Commission had suggested). 
On April 3, 1997, the Common Carrier Bureau issued a Public Notice 
seeking comment on certain specific questions relating to section 
272(e)(4). The pleading cycle closed on April 24, 1997.
    15. Bell Atlantic, NYNEX, SBC (which, after the merger, includes 
PacTel), and BellSouth (hereinafter ``the BOCs'') filed joint comments 
and reply comments that largely track the arguments made by Bell 
Atlantic and PacTel in their pleadings before the Court of Appeals. The 
BOCs focus principally on what they regard as the plain language of 
section 272(e)(4). As noted above, section 272(e)(4) states in relevant 
part that a BOC ``may provide any interLATA * * * services to its 
interLATA affiliate if such services * * * are made available to all 
carriers * * * on the same [rates,] terms and conditions, and so long 
as the costs are appropriately allocated.'' In the BOCs' view, the 
phrase ``may provide'' is the language of a grant of authority. They 
also emphasize that what Congress decided the BOCs ``may provide'' is 
not just some interLATA services, but ``any'' such services.
    16. The BOCs do recognize certain limits on this purported grant of 
authority. First, the BOCs effectively recognize that the grant of 
authority is limited to wholesale interLATA services, presumably 
because the only entities to which section 272(e)(4) contemplates the 
BOC providing interLATA services are ``its interLATA affiliate'' and 
``all carriers''--not end-users--and because reading section 272(e)(4) 
as a grant of authority to provide retail interLATA services would 
render section 272's separate affiliate requirement for interLATA 
services utterly meaningless. They also recognize that any grant of 
authority in section 272(e)(4) is conditioned on the satisfaction of 
the non-discrimination and cost-allocation requirements plainly set 
forth in that provision. Lastly, given that section 271(b) requires 
section 271(d)(3) approval before a BOC may provide in-region 
``interLATA services,'' a phrase that the BOCs agree includes wholesale 
as well as retail services, the BOCs concede that the section 271(d)(3) 
approval requirement must still be met before they may provide 
wholesale interLATA services to their affiliates and other carriers 
pursuant to section 272(e)(4). Nonetheless, in the BOCs' view, the 
``may provide'' language in section 272(e)(4) compels the conclusion 
that that section is fundamentally a grant of authority to the BOCs to 
directly offer in-region interLATA services, whatever the limits on 
that grant.
    17.To bolster their plain language argument, the BOCs further 
contend that

[[Page 36219]]

reading section 272(e)(4) as a grant of authority benefits long-
distance consumers. The BOCs generally claim that, if permitted by the 
statute, they intend to design, build, and operate new facilities-based 
interLATA networks, as well as maintain existing ones such as their 
Official Services Networks. After they receive section 271(d)(3) 
approval to provide in-region interLATA services, the BOCs assert that 
they would use the authority granted by section 272(e)(4) to sell 
interLATA services that can be provided over these networks, on a 
wholesale basis, to their affiliates (as well as other carriers). The 
BOCs argue that placing the design, construction, and operation of 
their interLATA networks in the local operating companies in this way 
benefits long-distance consumers because the BOCs are able to achieve 
considerable efficiencies that in turn lead to lower long-distance 
rates. A Bell Atlantic affidavit submitted by the BOCs explains the 
source of these potential efficiencies:

    Bell Atlantic intends to place the construction, ownership and 
operation of its long-distance network in its operating telephone 
companies. * * * [T]he reason is simple. The telephone companies 
currently provide local exchange, exchange access, and short-haul 
(or `intraLATA') long distance service. As a result, they already 
own some facilities, equipment and related support systems that can 
be used to provide both local and long-distance service. They also 
employ a skilled workforce that is trained in the construction, 
operation, installation and maintenance of telephone facilities and 
equipment, and that is capable of managing local and long distance 
facilities alike. Placing the construction and operation of long 
distance facilities (whether new or existing) in the operating 
telephone companies will allow us to make the most efficient use of 
these existing resources.

    18. Ten parties, including the largest interexchange carriers, a 
trade association representing long-distance resellers, and two state 
commissions, filed comments and/or reply comments opposing the view 
that section 272(e)(4) is an affirmative grant of authority. These 
parties focus primarily on what they regard as the plain language of 
272(a) and the flat prohibition they say it contains on direct BOC 
provision of all but a small, clearly specified subset of in-region 
interLATA services (e.g., five of the six incidental services) prior to 
the sunset of the separate affiliate requirement. Specifically, they 
focus on the phrases ``interLATA telecommunications services'' and 
``interLATA information services'' in section 272(a)(2) and argue that 
both phrases plainly apply to wholesale as well as retail services--
just as the more general phrase ``interLATA services'' in section 271 
applies to both. Parties opposing the BOCs also focus on the clearly 
specified subset of interLATA services that are exempted from the 
separate affiliate requirement in section 272(a)--``out-of-region'' 
services, ``incidental'' services, ``previously authorized'' services, 
``electronic publishing,'' and ``alarm monitoring''--and observe that 
``wholesale'' services are not among them. They find it significant as 
well that the MFJ, which the section 271/272 framework replaces in 
relevant part, imposed an outright bar on BOC provision of interLATA 
services and in so doing, did not distinguish between retail and 
wholesale services. In light of the flat prohibition in section 272(a), 
the opponents of the BOCs conclude, the only sensible way to read 
section 272(e)(4) is solely as a nondiscrimination and cost-allocation 
requirement that limits the manner in which BOCs may provide interLATA 
services that they are otherwise authorized to provide, such as the 
interLATA services that fall into the subset of exceptions in section 
272(a) and, when the separate affiliate requirements sunset, other 
interLATA services as well.
    19. The opponents of the BOCs also dispute the claim that reading 
section 272(e)(4) as a grant of authority benefits consumers. Most 
broadly, they assert that the BOCs' vision of an `` `integrated 
supplier' of local and long-distance services * * * is wholly 
disengaged from * * *  [and] at war with'' the separate affiliate 
requirement in section 272. Section 272, they explain, was Congress' 
response to the traditional concerns for discrimination and improper 
cost allocation that arise precisely when a dominant carrier providing 
local exchange and exchange access services seeks to provide long-
distance service on a physically integrated basis. More specifically, 
they emphasize that section 272 reflects Congress' fundamental decision 
to impose a structural, as opposed to a non-structural, solution in 
response to these concerns in the short-term.
    20. Lastly, the opponents of the BOCs argue that, in a world in 
which section 272(e)(4) is a grant of authority, it would be extremely 
difficult to enforce the non-discrimination requirement. The 
Telecommunications Resellers Association (TRA), for example, complains 
that non-facilities-based interLATA resellers, who are the would-be 
rivals of the BOCs' interLATA affiliates, ``know all too well from 
their experience * * * that even the slightest preference or 
discrimination can be highly consequential in a fast-paced competitive 
market.'' Moreover, according to TRA, ``[g]iven the comprehensive 
interaction between a non-facilities-based resale carrier and its 
network service provider, the opportunities for preference or 
discrimination abound.'' TRA explains that resellers need equal 
treatment not only with respect to the general rates, terms, and 
conditions of service but also with respect to ``myriad operational 
support systems such as order provisioning, trouble resolution and 
billing.'' Along similar lines, facilities-based interLATA service 
providers such as AT&T and MCI complain that the BOCs will be able to 
``customize'' the networks they build and the services they provide to 
be responsive to the needs of their interLATA affiliates. The principal 
point of such arguments appears to be that the difficulty of enforcing 
the non-discrimination requirement if we were to conclude that section 
272(e)(4) is a grant of authority is one more reason to question 
whether Congress intended section 272(e)(4) to be such a grant of 
authority.
    21. In response, the BOCs claim that any conflict between section 
272(a) and section 272(e)(4) is ``wholly imaginary'' because section 
272(a) merely establishes ``a general rule'' providing that the BOCs 
must provide certain services ``through'' an affiliate. The subsections 
that follow 272(a) then ``detail the conduct that Congress understood 
to be consistent with the general rule.'' Section 272(e)(4), they say, 
is one such provision. The BOCs claim the conflict is wholly imaginary 
also because one of the principal activities for which section 272(a) 
requires a separate affiliate is the ``[o]rigination of interLATA 
telecommunications services,'' and, in the BOCs'' view, the term 
``origination'' describes a retail interLATA service. They argue that, 
``[w]hen a BOC provides interLATA services to its affiliate under 
[section 272(e)(4)] * * *, it is not `originating' interLATA services. 
Rather, it is the affiliate that `originates' such services when its 
retail customers place interLATA calls.''
    22. Alternatively, the BOCs claim that, even assuming there were a 
conflict between section 272(a) and section 272(e)(4), ``[u]nder well-
established canons of statutory interpretation, the specific 
authorization contained in section 272(e)(4) would take precedence over 
the general language of section 272(a).''
    23. In response to the argument that the BOCs' notion of an 
integrated supplier is ``at war with'' section 272, the BOCs contend 
that the separate affiliate requirement in section 272 was

[[Page 36220]]

not designed to prevent a BOC from providing interLATA service on a 
physically integrated basis; rather it was designed ``to make entirely 
transparent the dealings between an operating company and its interLATA 
affiliate.'' As for the traditional concerns about discrimination and 
improper cost allocation that arise where a BOC provides integrated 
service, the BOCs contend that any such concerns that Congress may have 
had in enacting section 272 exist only where the BOC has incentives to 
engage in discrimination and cost shifting. According to the BOCs, the 
wholesale provision of interLATA services pursuant to section 272(e)(4) 
does not create such incentives because of the requirement that any 
wholesale interLATA services the BOC provides to its affiliate must be 
made available to any other carrier on the same rates, terms, and 
conditions. The BOCs assert that this requirement effectively 
eliminates any incentives to engage in discrimination or improper cost 
allocation because, according to the BOCs, any advantage the BOC would 
gain from engaging in such conduct could not be captured by the 
affiliate alone. Rather, the advantages would necessarily be offered to 
all carriers.

IV. Discussion

    24. As an initial matter, we agree with the BOCs to this extent: 
the phrase ``may provide'' in section 272(e)(4), if viewed in 
isolation, could reasonably be read as a grant of authority. Thus, 
standing alone without reference to any other statutory provision, 
section 272(e)(4) could reasonably be read to allow a BOC to provide 
directly any interLATA services, including in-region services, to its 
affiliate so long as it does so in conformity with the non-
discrimination and cost allocation requirements in that provision.
    25. But section 272(e)(4) cannot be viewed in isolation; it must be 
read in conjunction with other provisions to which it is integrally 
related. And a thorough analysis of sections 271 and 272 confirms our 
view that section 272(e)(4) is not an independent grant of authority 
for the BOCs to provide wholesale interLATA services on an unseparated 
basis. We conclude first that section 272(a), in relevant part, 
prohibits the BOCs from doing precisely what the BOCs claim section 
272(e)(4) authorizes them to do. Specifically, section 272(a) prohibits 
the BOCs, after obtaining section 271(d)(3) approval and until sunset 
of section 272's requirements, from providing directly most in-region 
interLATA services, including wholesale services, except through a 
separate affiliate. We thus confront an apparent conflict between 
section 272(a) and section 272(e)(4). In so doing, we further conclude 
that the only plausible construction of either provision that 
reconciles the apparent conflict and serves the core purposes for which 
Congress imposed a separate affiliate requirement is a construction of 
section 272(e)(4) according to which it is a non-discrimination 
requirement--a requirement that is similar in function, not 
surprisingly, to the non-discrimination requirements that appear in 
sections 272(e)(1), 272(e)(2), and 272(e)(3). The BOCs' reading of 
section 272(e)(4), by contrast, fails to serve such purposes and 
further, requires us to believe that Congress intended to tuck away a 
fundamental grant of authority in section 272(e). In these respects and 
others, our analysis indicates that the interpretation proffered by the 
BOCs is unpersuasive.
    26. We find unconvincing the reasons advanced by the BOCs in 
support of their claim that the separate affiliate requirement in 
section 272(a) can reasonably be read to refer only to retail services. 
As summarized above, the BOCs first seek to justify this reading of the 
statute on the ground that section 272(a) establishes a ``general'' 
rule and that that general rule is necessarily read to refer only to 
retail services because that is the reading that makes the general rule 
consistent with the apparent grant of authority in section 272(e)(4) to 
provide wholesale services. There is nothing ``general,'' however, 
about the separate affiliate requirement in section 272(a) with respect 
to the interLATA services that are covered by that requirement. In 
particular, section 272(a)(1) states that a BOC may not provide ``any 
service described in [section 272(a)(2)]'' unless it provides ``that 
service'' through an affiliate. Section 272(a)(2) then specifies 
precisely ``[t]he services for which a separate affiliate is 
required,'' namely, manufacturing activities, the origination of 
interLATA telecommunications services (with three exceptions), and 
interLATA information services (with two exceptions). Thus, the scope 
of section 272(a)'s separate affiliate requirement appears plainly to 
be fleshed out by section 272(a)(2), not by subsequent provisions in 
section 272 such as section 272(e)(4).
    27. This last point also serves as a complete response to the BOCs' 
persistent emphasis on the word ``through'' in section 272(a)(1). In 
the BOCs'' view, section 272(a)(1) does not categorically prohibit a 
BOC from providing directly the services listed in section 272(a)(2); 
rather, section 272(a)(1) says that the BOC may not provide such 
services unless ``it,'' the BOC, provides such services ``through'' an 
affiliate. And, in the BOCs'' view, ``one of the most natural ways'' 
for a BOC to provide such services ``through'' an affiliate is to 
provide them to an affiliate, on a wholesale basis, and then to have 
the affiliate resell the services on a retail basis. As an initial 
matter and as explained in more detail below, in the context of past 
separate affiliate requirements that have been imposed on the BOCs for 
the provision of competitive services that require local BOC facilities 
as an input, there is nothing ``natural'' about the BOCs' proposed 
wholesale/retail framework, which would allow the BOCs to provide 
interLATA services on a fully integrated basis. Such requirements, 
where a court or agency has chosen to impose them, have never allowed 
such integration of local BOC facilities and the extra facilities 
necessary to provide the competitive service at issue. In any event, 
whether ``natural'' or not, providing integrated interLATA services 
``through'' a BOC affiliate by providing such services to the affiliate 
cannot be squared with the language of section 272(a)(2). As 
demonstrated above, section 272(a)(2) includes the exclusive list of 
services that a BOC must provide ``through'' an affiliate. That list 
includes ``interLATA telecommunications services'' and ``interLATA 
information services,'' which--as demonstrated immediately below--
plainly include wholesale as well as retail services. Thus, it is clear 
that section 272(a) requires the BOCs to provide wholesale interLATA 
services ``through'' an affiliate, just as it requires them to provide 
retail interLATA services ``through'' an affiliate.
    28. The BOCs' other basis for reading section 272(a) to refer only 
to retail services rests on the use of the term ``[o]rigination'' in 
the phrase ``[o]rigination of interLATA telecommunications services'' 
in section 272(a)(2). As explained above, the BOCs assert that, 
``[w]hen a BOC provides interLATA services to its affiliate under 
[section 272(e)(4)], * * * it is not `originating' interLATA services. 
* * * [I]t is the affiliate that `originates' such services when its 
retail customers place interLATA calls.'' Significantly, however, the 
BOCs do not offer any dictionary definition of ``origination,'' nor a 
definition drawn from any other authoritative source, that supports 
their particular understanding of the term. Rather, they argue that the 
term ``origination'' derives its meaning from the context of section 
272. Although we

[[Page 36221]]

agree that the term must be understood in its proper context, the 
difficulty with the BOCs' position is that they simply assert, without 
explanation, that the proper context is ``the specific activity of 
providing interLATA services to . . . customers,'' i.e., providing 
retail interLATA services. In contrast, sections 271 and 272 indicate 
that Congress was almost certainly using the term ``origination'' in 
section 272(a)(2) in a geographical sense.
    29. Specifically, it is far more likely that, by requiring a 
separate affiliate for ``[o]rigination of interLATA telecommunications 
services,'' Congress simply meant to clarify that a separate affiliate 
is required for certain interLATA telecommunications services as judged 
by the point of origination of such services. Such a clarification 
might have been considered helpful in light of the fact that, as noted 
above, one of the exceptions to the separate affiliate requirement for 
``[o]rigination of interLATA telecommunications services'' is for 
``out-of-region'' services, that is, services for which the point of 
origination is outside a BOC's in-region states. This out-of-region 
versus in-region distinction is one of the fundamental distinctions in 
section 271; section 271 permits immediate entry for the former, but 
requires section 272(d)(3) approval for the latter. It is therefore 
only natural that Congress would have wanted to maintain--and did 
maintain--that same distinction in the separate affiliate requirement 
in section 272. Further, this view of ``origination'' in section 
272(a)(2) appears to be consistent with the absence of that term with 
respect to ``interLATA information services.'' Because Congress failed 
to include an ``out-of-region'' services exception with respect to 
interLATA information services, a separate affiliate is required for 
such services regardless of their point of origination.
    30. The legislative history supports our view that the term 
``origination'' was meant merely as a helpful clarification. It appears 
that the term ``origination'' was not part of either the Senate or the 
House version of section 272(a), but was added during the 
reconciliation conference. For example, the Senate version of section 
272(a), which was the template for the final version, stated, ``The 
services for which a separate subsidiary is required * * * are: (A) 
Information services * * * (B) Manufacturing services * * * (C) 
InterLATA services.* * *'' Thus, both houses of Congress passed 
versions of section 272(a) in which the separate affiliate requirement, 
even the BOCs would have to agree, clearly applied to both retail and 
wholesale interLATA services. The explanation in the Joint Explanatory 
Statement of the Senate version of section 272 confirms this. It 
describes the services for which a separate affiliate is required as 
including ``interLATA telecommunications services,'' without the term 
``origination'' preceding it and without any indication of a wholesale/
retail distinction. Thus, to accept the BOCs' argument, one would have 
to conclude that the addition of the term ``origination'' during the 
conference reflected Congress' decision to reject the broad consensus 
that had been reached on the scope of the separate affiliate 
requirement and to cut back on it significantly by limiting the 
requirement to retail service offerings that originate within the BOC's 
service territory. If this were the case, one would expect, at a 
minimum, some discussion of such a decision in the legislative history, 
but we have found no such discussion, and the parties have not pointed 
to any. The Joint Explanatory Statement, for example, is silent on the 
issue. Rather, the explanation in the Joint Explanatory Statement of 
the final version of section 272 simply states, ``The conference 
agreement adopts the Senate provisions with several modifications,'' 
and then goes on to discuss the major changes that occurred, without 
mentioning the addition of ``origination.''
    31. Moreover, equating the ``origination'' of a service with the 
retail provision of that service appears to lead to unlikely results in 
two respects. First, as just noted, the term ``origination'' does not 
precede the other main category of interLATA service for which a 
separate affiliate is required, namely, interLATA information services. 
Under the BOCs' reading of the statute, then, in-region wholesale 
interLATA information services would still generally require a separate 
affiliate, while in-region wholesale interLATA telecommunications 
services would not. Yet Congress treated these two kinds of in-region 
interLATA services identically for section 271 purposes, requiring 
section 271(d)(3) approval for both. The BOCs have not advanced any 
plausible rationale for why Congress would have treated them 
fundamentally differently for section 272 purposes.
    32. Second, equating the ``origination'' of a service with the 
retail provision of that service also appears to lead to unlikely 
results because of the interplay between sections 271(a) and 271(b). 
Section 271(a) bars BOC provision of ``interLATA services''--which, as 
noted above, the BOCs agree include wholesale services--``except as 
provided in this section.'' Section 271(b) then authorizes, on various 
timetables, ``interLATA services originating in any of [a BOC's] in-
region States,'' ``interLATA services originating outside its in-region 
States,'' and certain ``incidental interLATA services * * * originating 
in any State.'' If the term ``origination'' in section 272(a)(2) refers 
only to the provision of retail interLATA services, then the references 
to ``originating'' in section 271(b) would also appear to refer to 
retail interLATA services. Consequently, under the BOCs' reading of the 
statute, section 271(a) bars a BOC from providing wholesale interLATA 
services, but no provision of section 271(b) authorizes the BOCs to 
provide these services, including out-of-region and incidental 
wholesale services. Thus, we conclude that a carrier ``originat[es]'' 
an in-region interLATA service in a particular state when it provides 
in-region interLATA service regardless of whether it provides that 
service on a wholesale or a retail basis.
    33. We note that, during the proceeding that resulted in the Non-
Accounting Safeguards First Report and Order, certain of the BOCs 
advanced a different argument as to why the language of section 272(a) 
does not cover wholesale services: that the phrase ``telecommunications 
services'' itself--statutorily defined as ``the offering of 
telecommunications for a fee directly to the public, * * * regardless 
of the facilities used''--covers only retail services. Proponents of 
this interpretation contended that wholesale telecommunication services 
are not offered directly to ``the public,'' but only to other carriers. 
In the Non-Accounting Safeguards First Report and Order, the Commission 
addressed this argument at length and rejected it primarily on the 
ground that it could find no basis in the statute, legislative history, 
or FCC precedent for finding the reference to ``the public'' in the 
statutory definition to be intended to exclude wholesale 
telecommunications services. Rather, the Commission concluded that the 
phrase ``the public'' was meant only to exclude private carriage 
services, as opposed to common carrier services. While the BOCs have 
not pressed this particular argument before the court or before the 
Commission on reconsideration, Omnipoint has pressed a variant of it in 
response to the Bureau's request for comments on the scope of section 
272(e)(4).
    34. In providing wireless service, Omnipoint explains that it often 
needs transport services that cross LATA boundaries and that it could 
deliver a more efficient wireless service if it

[[Page 36222]]

could use the BOCs' interLATA transport facilities, such as the 
existing transport facilities that are part of the BOCs' Official 
Services Networks, rather than build its own interLATA transport 
facilities or lease the interLATA transport facilities of existing 
interLATA service providers (facilities which Omnipoint says are 
inconveniently located for its purposes). Its principal legal argument 
is that our conclusion in the Non-Accounting Safeguards First Report 
and Order that the phrase ``telecommunications services'' covers all 
wholesale (as well as retail) telecommunication services was ``overly 
broad'' and that it should be construed to exclude at least one kind of 
wholesale arrangement, carrier-to-carrier leasing of high-capacity 
private lines. We find no basis in the statutory definition of 
``telecommunications services,'' however, for concluding that this kind 
of wholesale arrangement, as opposed to all other kinds, falls outside 
that definition.
    35. In providing wireless service, Omnipoint explains that it often 
needs transport services that cross LATA boundaries and that it could 
deliver a more efficient wireless service if it could use the BOCs' 
interLATA transport facilities, such as the existing transport 
facilities that are part of the BOCs' Official Services Networks, 
rather than build its own interLATA transport facilities or lease the 
interLATA transport facilities of existing interLATA service providers 
(facilities which Omnipoint says are inconveniently located for its 
purposes). Its principal legal argument is that our conclusion in the 
Non-Accounting Safeguards First Report and Order that the phrase 
``telecommunications services'' covers all wholesale (as well as 
retail) telecommunication services was ``overly broad'' and that it 
should be construed to exclude at least one kind of wholesale 
arrangement, carrier-to-carrier leasing of high-capacity private lines. 
We find no basis in the statutory definition of ``telecommunications 
services,'' however, for concluding that this kind of wholesale 
arrangement, as opposed to all other kinds, falls outside that 
definition.
    36. US WEST, like the other BOCs, does not dispute that the 
statutory definition of ``telecommunications services'' applies to 
wholesale telecommunications services. It merely observes that the 
statutory definition does not cover all telecommunications-like 
services--most significantly, it does not include private carriage 
services--and that the BOCs should be able to provide directly any 
service that falls outside that definition. With the important 
reminders that (1) wholesale telecommunications services are one kind 
of telecommunications-like services that, as just noted, does not fall 
outside that definition, and (2) the separate affiliate requirement 
also applies to in-region interLATA information services, we have no 
objection to this observation. In this regard, however, we note our 
serious doubts whether there is any interLATA service that a BOC might 
seek to provide to its affiliate that could be properly characterized 
as a private carriage service, given that the BOC would be under a 
legal obligation pursuant to sections 272(c)(1) and 272(e)(4) to make 
such service available to any other entity--a hallmark of a common 
carrier service.
    37. Firmly bolstering our view that nothing in section 272(a)(2) 
suggests a wholesale/retail distinction--not ``origination,'' not 
``telecommunication services,'' and not any other term or phrase--is 
the fact that section 251(c)(4) demonstrates that, when Congress means 
to create an important wholesale/retail distinction, it does so 
clearly, a point we emphasized in the Non-Accounting Safeguards First 
Report and Order. Section 251(c)(4) imposes a duty on incumbent local 
exchange carriers to offer for resale at wholesale rates ``any 
telecommunications service that the carrier provides at retail to 
subscribers who are not telecommunications carriers.'' Moreover, 
section 272(a)(2) sets out quite specifically the three kinds of 
services for which a separate affiliate is required and the exceptions 
to each kind of service. Congress' attention to detail in this respect 
makes the lack of any straightforward textual indication of a 
wholesale/retail distinction in section 272 all the more telling. In 
sum, we reject the BOCs' assertion that section 272(a) prohibits a BOC 
from offering directly to customers only retail interLATA services 
originating in-region.
    38. We think that section 272(b)(1), which requires the separate 
affiliate to ``operate independently'' of the BOC, provides independent 
support for the fact that Congress did not intend the BOCs to provide 
in-region interLATA services, on a wholesale basis, to their affiliates 
and other carriers. To allow the BOCs to provide such services would be 
to allow them to place the design, construction, and operation of their 
interLATA facilities in their local operating companies and thus to 
provide their wholesale in-region interLATA services over a uniquely 
integrated local-interLATA network. As explained above, however, we 
concluded in the Non-Accounting Safeguards First Report and Order that 
section 272(b)(1) was principally designed to prevent substantial 
integration of the local operating company's local network facilities 
and the separate affiliate's long-distance network facilities (assuming 
the affiliate chooses to be a facilities-based provider rather than a 
reseller). And such a conclusion plainly presupposes that Congress did 
not intend that local and interLATA facilities could be integrated 
within the local operating company itself. For what purpose could 
Congress have had in prohibiting physical integration of the local 
operating company's local facilities and the affiliate's interLATA 
facilities if complete physical integration of local and interLATA 
networks within the local operating company itself would be permitted 
regardless?
    39. Having concluded that section 272(a), reinforced by section 
272(b)(1), prohibits in relevant part precisely what the BOCs claim 
section 272(e)(4) authorizes, we now address the BOCs' alternative 
arguments regarding the proper interpretation of section 272(e)(4). As 
summarized above, the BOCs contend that, even assuming arguendo we were 
to find an apparent conflict between sections 272(a) and 272(e)(4), 
under the well-established canon of construction, the more specific 
provision overrides the more general provision. Even assuming arguendo 
that this canon were applicable, however, it is far from clear that 
section 272(e)(4) should be considered the more specific provision and 
section 272(a) the more general. While there are certain respects in 
which section 272(e)(4) is the more specific provision, there are also 
certain respects in which section 272(e)(4) is the more general. For 
example, one could reasonably view section 272(e)(4) as the more 
general provision because that section, under the BOCs' reading of it, 
constitutes a broad grant of authority to provide directly, on a 
wholesale basis, any interLATA services, any interLATA facilities, any 
intraLATA services, and any intraLATA facilities, whereas section 
272(a) is a circumscribed limitation on that broad grant that requires 
that, out of the entire universe of interLATA or intraLATA facilities 
or services that a BOC is purportedly authorized to provide directly, 
certain such services--specifically, manufacturing activities, 
interLATA telecommunications services (with three exceptions), and 
interLATA information services (with two

[[Page 36223]]

exceptions)--be provided through a separate affiliate.
    40. It is also far from clear why, if we were to conclude that 
section 272(e)(4) overrides section 272(a), we would not have to 
conclude that it also overrides section 271(a), thus permitting the 
BOCs to provide any wholesale interLATA services immediately, before 
section 271(d)(3) approval--a result, as mentioned above, the BOCs 
disavow. In this regard, the BOCs' attempt to distinguish section 
271(a) and section 272(a) is unpersuasive. Specifically, they argue 
that section 271(a) does not give way to section 272(e)(4) because 
section 271(a) states that a BOC may not provide interLATA services 
``except as provided in this section,'' and section 272(e)(4) is not 
``in this section.'' Yet, as explained above, we think the text of 
section 272(a) directs equally clearly that the services for which a 
separate affiliate is required, along with any exceptions, are to be 
found in section 272(a)(2) and only that provision, not in subsequent 
provisions of section 272 such as section 272(e)(4).
    41. In any event, we find that the canon the BOCs seek to invoke is 
not applicable in this instance, at least not in the way in which the 
BOCs have described it. The canon that ``the specific governs the 
general'' only applies where the conflict between the statutory 
provisions is inescapable, that is, where there is no plausible 
construction of either provision that allows the conflict to be 
reconciled. This is for good reason, for the application of the canon 
where there is no such construction presupposes that Congress has 
contradicted itself--a position that should be adopted only as a last 
resort. Thus, we are obliged to determine whether there is a plausible 
construction of either section 272(a) or 272(e)(4) that allows us to 
reconcile the apparent conflict, making sense of both provisions and 
serving the purposes of the statute to the greatest extent possible.
    42. We are doubtful that there is any plausible construction of 
section 272(a) that would allow us to reconcile the apparent conflict 
and adopt the BOCs' reading of section 272(e)(4). As discussed at 
length above, the BOCs' characterization of section 272(a) as a 
``general'' rule, to be given content by the subsequent subsections of 
section 272, cannot be sustained in light of that rule's clear 
directive to look specifically to the list of services in section 
272(a)(2). Moreover, the BOCs' interpretation of ``origination'' as 
referring to the provision of interLATA services to retail customers 
who place interLATA calls does not appear to have any basis in the 
common usage of that term and appears to lead to unlikely results. The 
only other possible construction would be to add to the list of 
exceptions in section 272(a)(2) a ``wholesale services'' exception. 
While there may be situations where it is defensible to read an 
exception into a statute in order to reconcile an otherwise 
irreconcilable statutory conflict, that seems inappropriate where, as 
here, Congress explicitly focused on the issue of exceptions and 
prescribed a specific list. Buttressing this point is the fact that the 
Senate version of section 272 would have expressly authorized the 
Commission to grant exceptions to the separate affiliate requirement, 
but that provision was dropped by the conferees.
    43. By contrast, we conclude that there is a plausible construction 
of section 272(e)(4) that reconciles the apparent conflict with section 
272(a) and does so in a way that is uniquely consistent with the 
specific policy choice that Congress made in enacting the separate 
affiliate requirement. Specifically, as we previously concluded in the 
Non-Accounting Safeguards First Report and Order, we construe section 
272(e)(4) to mean that the BOC may provide any interLATA or intraLATA 
facilities or services it is otherwise authorized to provide to its 
interLATA affiliate if such services or facilities are made available 
to all carriers at the same rates and on the same terms and conditions, 
and so long as the costs are appropriately allocated. Thus, in our 
view, section 272(e)(4) is not a grant of authority; it merely 
prescribes the manner by which BOCs may provide interLATA and intraLATA 
facilities and services to their affiliates.
    44. We believe this construction of section 272(e)(4) does not have 
any of the defects alleged by the BOCs that might render the 
construction implausible. First, our reading gives effect to all of the 
statute's existing terms, including the key terms ``may provide'' and 
``any'' on which the BOCs rely; our interpretation just does not read 
these terms as effectuating a grant of authority.
    45. Second, our interpretation does not render section 272(e)(4) 
meaningless or redundant. Far from it, the provision serves precisely 
the same function as the other three provisions in section 272(e). As 
explained above, section 272(c)(1) imposes a general non-discrimination 
requirement on the BOCs in their dealings with affiliates. In order 
``to reduce litigation,'' however, Congress, in section 272(e), set 
forth more particularized non-discrimination requirements tailored to 
specific contexts. Section 272(e)(1), for example, sets forth a non-
discrimination requirement with respect to the time in which a BOC 
fulfills requests for local exchange or exchange access service. 
Similarly, section 272(e)(4) sets forth a non-discrimination 
requirement with respect to the provision of interLATA or intraLATA 
facilities and services that a BOC is otherwise authorized to provide--
services such as out-of-region services, five of the six incidental 
services, previously authorized activities, and perhaps most 
importantly, all other interLATA services as the separate affiliate 
requirements expire.
    46. In light of the similar function that section 272(e)(4), under 
our reading, serves in relation to the other three provisions of 
section 272(e), our reading also draws support from the well-
established canon of construction that statutory provisions are to be 
construed in light of the company they keep. Our interpretation of 
section 272(e)(4) is also consistent with the overriding focus of 
section 272 generally. As both the text of section 272 and the 
descriptions of the provision in the legislative history make clear, 
section 272 primarily establishes structural separation requirements 
and other safeguards applicable to the BOCs' provision of interLATA and 
other services that the BOCs are elsewhere authorized to provide (in 
section 271, for the most part). In contrast, the BOCs' proposed 
reading of section 272(e)(4) as a grant of authority is flatly 
inconsistent with the thrust of section 272(e) in particular and 
section 272 in general. It seems unlikely enough that Congress would 
have placed a fundamental grant of authority to the BOCs in section 
272, the thrust of which, as just noted, is to prescribe the manner in 
which the BOCs may enter certain new markets; but it seems utterly 
implausible that Congress would have placed such a grant in section 
272(e) as the fourth subsection of a provision entitled ``Fulfillment 
of Certain Requests,'' following three other subsections that all 
impose restrictions on the BOCs.
    47. We recognize that our preferred interpretation of section 
272(e)(4) does not give this provision the great significance the BOCs' 
interpretation does. We think this fact weighs in favor of our 
interpretation, however, because judging from the legislative history, 
Congress did not appear to regard section 272(e)(4) as a particularly 
significant provision, just as it did not appear to attach great 
significance to the addition of the term ``origination'' in section 
272(a). Specifically, section 272(e)(4) was introduced as part of a

[[Page 36224]]

lengthy managers' amendment to the Senate version of section 272. 
Significantly, the amendment as a whole was described merely as 
``mak[ing] certain technical corrections.'' Moreover, at no point 
during the discussion of the managers' amendment was there any specific 
discussion of section 272(e)(4) or its impact. Nor does there appear to 
have been any such discussion of this provision at any later point in 
the legislative history. The absence of any discussion on the measure 
would seem highly unlikely, however, if section 272(e)(4) were really 
intended to be a fundamental grant of authority as the BOCs claim.
    48. Finally, and most importantly, we think our interpretation is 
not only a plausible construction of the text, but also the only 
construction that can be squared with the considered policy choice 
Congress made in imposing a separate affiliate requirement for in-
region interLATA services. For many years, until the passage of the 
Telecommunications Act of 1996, a well-known regulatory debate took 
place--in the federal courts, in the Department of Justice, in the 
Commission, and among industry groups, antitrust law experts, and 
economists--regarding the wisdom of allowing the BOCs, as regulated 
entities that control the bottleneck facilities of the local network, 
to provide services in potentially competitive markets that require 
these bottleneck facilities as an essential input of such services. 
Examples of such services include interLATA services, which are 
provided by connecting a BOC's local bottleneck facilities to interLATA 
facilities, enhanced services, which are provided by connecting the 
BOC's local facilities to computer facilities, and wireless services, 
which are provided by connecting the BOC's local facilities to wireless 
facilities. Certain parties in this debate emphasized the anti-
competitive dangers that arise if the BOC is permitted to provide such 
services on a physically integrated basis. That is, they emphasized the 
dangers that arise if the BOC is allowed to place the design, 
construction, and operation of the non-local facilities at issue--such 
as interLATA facilities in the case of interLATA services, computer 
facilities in the case of enhanced services, or wireless facilities in 
the case of wireless services--in the local operating company. For 
example, with respect to interLATA services, these parties were 
concerned that a BOC, if permitted to provide such services on an 
integrated basis, would have the ability and incentive to arrange more 
efficiently designed, higher quality connection between its local 
network and its interLATA facilities than between its local network and 
rivals' interLATA facilities. They were also concerned that a BOC might 
take the common costs of the facilities (and employees) that are 
jointly used to provide both local and interLATA service and allocate, 
on its books of account, an undue proportion of such costs to its local 
operations. As suggested above, such improper cost allocation would 
allow the BOCs to overcharge local service ratepayers while at the same 
time inefficiently undercut their interexchange competitors. On the 
other side of the debate, the BOCs emphasized the significant 
integrative efficiencies that result from being able to have the same 
facilities (and employees) that are used in the design, construction, 
and operation of their local networks used in the design, construction, 
and operation of their interLATA networks. And they also disputed that 
service on a physically integrated basis raises the anti-competitive 
dangers described above. The MFJ bar on the provision of interLATA 
services, which preceded the section 271/272 framework, clearly 
reflected a judgment that the dangers were serious and outweighed any 
benefits.
    49. There was a related well-known debate during these years over 
the wisdom of requiring the BOCs, in the event they were to be 
permitted to provide competitive services that require the BOCs' local 
facilities as an input for such services, to do so through a separate 
affiliate. For certain such services such as wireless services, the 
Commission decided, precisely because of the anti-competitive dangers 
described above, that a separate affiliate would generally be required. 
With respect to the provision of interLATA services on a non-dominant 
basis by local exchange carriers other than the BOCs (which were not 
covered by the MFJ), the Commission decided the same. For other 
services such as enhanced services, the Commission originally 
determined that a separate affiliate would be required, but 
subsequently decided that non-structural safeguards would suffice. The 
particulars of these decisions is not the point here, however. Rather, 
the key point is that, as reflected in these and other similar court 
and agency decisions, both sides in these separate affiliate debates, 
as well as the decisionmakers who resolved them at various points, 
shared a common assumption about what was fundamentally at stake in 
such debates, namely, whether the BOCs could provide the competitive 
service at issue on an end-to-end, physically integrated basis. Thus, 
for example, in the many years of debate over the wisdom of a separate 
affiliate requirement for enhanced services, it was uniformly assumed 
that what was at issue was the BOCs' right to place the design, 
construction, and operation of the computer facilities necessary to 
furnish enhanced services--the computer hardware, the databases, etc.--
in the local operating company and thus to provide such services on an 
end-to-end, physically integrated basis.
    50. In any event, in enacting sections 271 and 272 of the 
Telecommunications Act of 1996, Congress ended the debate with respect 
to interLATA services and decided the issue legislatively. With respect 
to in-region interLATA services in particular, the section 271/272 
framework permits the BOCs to provide such services once they obtain 
section 271(d)(3) approval, but they have to do so, at least initially, 
through a separate affiliate. And as noted above, we are not at liberty 
to depart from that decision during the period in which the statutory 
separate affiliate requirements are in effect.
    51. The BOCs respond that Congress' decision to impose a separate 
affiliate requirement did not necessarily include the decision to 
preclude a BOC from providing in-region interLATA service on a 
physically integrated basis, that is, from placing the design, 
construction, and operation of interLATA network facilities in the 
local network operating company. Rather, in their view, the separate 
affiliate requirement is designed merely ``to make entirely transparent 
the [wholesale] dealings between an operating company and its interLATA 
affiliate,'' and is entirely agnostic on whether the service ultimately 
being provided by the BOC to the affiliate and being sold by the 
affiliate to end users is a uniquely integrated one. Yet, as discussed 
above, a bar on the integration of a BOC's local facilities and the 
additional BOC facilities necessary to provide competitive services 
such as interLATA services has always been understood by courts and 
agencies, and the lawyers and economists arguing before them, as the 
sine qua non of a separate affiliate requirement, and we presume that 
Congress chose to impose a separate affiliate requirement in section 
272 with that long-held common understanding in mind. And we presume 
this for good reason. Again as explained above, the concerns for 
discrimination and improper cost allocation that have

[[Page 36225]]

always been understood as the justification for the imposition of a 
separate affiliate requirement are most present where interLATA 
services are being provided on an integrated basis.
    52. Indeed, were we to conclude that the BOCs were permitted to 
provide interLATA services on an integrated basis, it is hard to 
understand why Congress would choose to require that a separate 
affiliate ``operate independently'' of the BOC, or more importantly, 
why it would choose to require a separate affiliate at all. To be sure, 
as the BOCs explain, a separate affiliate also forces the dealings 
between the operating company and interLATA affiliate to be ``entirely 
transparent.'' But the only dealings that would take place between the 
operating company and the separate affiliate under the BOCs' vision of 
an integrated supplier are the typical dealings that take place between 
a facilities-based interLATA service provider and a reseller, that is, 
dealings related to the pricing, ordering, and billing of the 
facilities-based provider's interLATA services. And the possibility of 
discrimination in the wholesale pricing, ordering, and billing of 
interLATA services, by itself, has never been thought to justify, so 
far as we are aware, the imposition of a separate affiliate requirement 
in an analogous context. It is not surprising, then, that we are also 
not aware of a separate affiliate requirement in any analogous context, 
statutory or regulatory, past or present, in which a BOC or similarly 
regulated entity has been permitted to provide facilities-based 
integrated service to the separate affiliate, so long as it does not 
also sell the service to end users.
    53. The BOCs also argue that, even assuming that Congress, in 
enacting section 272, was generally concerned with the risks of 
discrimination and improper cost allocation that arise with the 
provision of facilities-based integrated service, such risks are 
insubstantial in light of the non-discrimination requirement in section 
272(e)(4) (even under their reading of it as a grant of authority) that 
bars a BOC from advantaging its interLATA affiliate. They observe that 
Congress viewed the risk of discrimination and improper cost allocation 
as problematic only where the BOCs possess not only the ability to 
engage in such conduct, but also the incentive. In this case, the BOCs 
argue, the non-discrimination requirement in section 272(e)(4) removes 
any ``conceivable incentive'' they might otherwise have to engage in 
prohibited conduct in the provision of wholesale interLATA services.
    54. As an initial matter, we do not think that the presence of a 
non-discrimination requirement would remove a BOC's incentive to 
advantage its affiliate, given, among other things, the numerous 
practical difficulties in enforcing such a requirement. But even 
assuming arguendo that it would diminish the BOC's incentive to some 
extent, the BOCs' argument here cannot withstand scrutiny. As explained 
above, in a world in which section 272(e)(4) is a grant of authority, 
the affiliate would be acting as a reseller that purchases finished 
wholesale interLATA services from a facilities-based interLATA service 
provider, i.e., the BOC. Thus, the only incentive the presence of a 
non-discrimination requirement would diminish is the incentive of the 
local operating company to discriminate in the pricing, ordering, and 
billing of wholesale interLATA services in favor of the affiliate. Any 
benefits of this kind of unlawful conduct could not be captured 
entirely by the affiliate but would have to be shared. But the non-
discrimination requirement certainly would not diminish the local 
operating company's more serious incentive to discriminate in the 
internal design, construction, and operation of interLATA networks in 
favor of itself (concern for which, as just explained, has always been 
the primary justification for separate affiliate requirements in this 
area) and at the expense of its rival facilities-based interLATA 
service providers. Any benefits of this kind of unlawful conduct could 
be captured entirely by the local operating company when it sells 
finished wholesale interLATA services to its affiliate and other 
resellers. In this regard, we find it significant that the BOCs claim 
that `` `there is no possibility that a BOC could use its supply of 
wholesale interLATA services to its affiliate to impede competition in 
the retail market.' '' They make no similar claim about the possibility 
that a BOC could impede competition in the way it creates that supply. 
Thus, because it is clear that, with respect to the design, 
construction, and operation of interLATA networks, the BOCs have the 
ability and incentive to engage in the very core prohibited conduct 
that Congress was concerned about when it made its policy choice to 
require separate affiliates, that choice is controlling.
    55. Finally, our conclusion that section 272(e)(4) is not a grant 
of authority serves as a complete response to the BOCs' arguments 
regarding use of their in-region, interLATA Official Services Networks. 
In the Non-Accounting Safeguards First Report and Order, we noted that 
a BOC is permitted to ``transfer ownership'' of its Official Services 
Network to its affiliate (so long it did so in a way that gave other 
carriers an equivalent opportunity to obtain ownership). We did not 
offer any discussion of the issue, however, because there was no 
indication in the record before us that transferring ownership of these 
Networks to affiliates was something that the BOCs seek to do. As a 
Bell Atlantic affidavit filed in response to our expedited 
reconsideration of section 272(e)(4) notes, these networks are 
``currently used in the operation of the local telephone network'' and 
thus their ownership ``realistically cannot be transferred.'' Rather, 
the BOCs seek to maintain ownership of their interLATA Official 
Services Networks and lease excess capacity on the networks to their 
affiliates. The leasing of capacity on an in-region interLATA network 
is plainly an in-region interLATA service, however. And, as we conclude 
in this Second Order on Reconsideration, because section 272(e)(4) is 
not a grant of authority, a BOC may not directly provide in-region 
interLATA services until the separate affiliate requirement is removed.

V. Conclusion

    56. For the reasons stated, we find that the most sensible 
interpretation of section 272(e)(4) is that it is a non-discrimination 
and cost allocation requirement that applies to interLATA services that 
the BOC is otherwise authorized to provide; it is not an affirmative 
grant of authority to provide integrated interLATA services on a 
wholesale basis. In so finding, we emphasize that Congress did not 
ignore, nor have we, the integrative efficiencies that may result when 
the same people and facilities of a BOC that provide local service 
provide interLATA service as well. Indeed, by providing for the sunset 
of the separate affiliate requirement within three years of BOC entry 
(for telecommunications services) unless the Commission acts otherwise, 
Congress envisioned that there may well come a point when the benefits 
of such efficiencies come to outweigh any risk of anti-competitive harm 
due to discrimination and improper cost allocation such that consumers 
are better off. In this respect, the BOCs' emphasis on these benefits 
is not misguided; it is merely premature.

VI. Ordering Clauses

    57. Accordingly, it is Ordered that, pursuant to sections 1-4, 201-
205, 214,

[[Page 36226]]

251, 252, 271, 272, and 303(r) of the Communications Act of 1934, as 
amended, 47 U.S.C. Secs. 151-154, 201-205, 214, 251, 252, 271, 272, and 
303(r), the Second Order on Reconsideration in CC Docket No. 96-149 is 
Adopted.

Federal Communications Commission.
William F. Caton,
Acting Secretary.
[FR Doc. 97-17647 Filed 7-3-97; 8:45 am]
BILLING CODE 6712-01-P